The biggest event of the weekend, if not the month, was China’s FX reserve outflow update, which at $100BN was slightly better than the $120BN expected (it pushed China’s reserves to the lowest in nearly 4 years) but it was in the “no man’s land” between the BofA best case scenario ($37.5BN), and the GS worst case ($197BN). And while there was some hope this number, together with China being offline for the next week could lead to some stability across markets, this is what we said yesterday about this indecisive number: “for markets, what this means is that the next month will likely be market by more of the same sharp, illiquid volatility that has characterized 2016 so far.”
So far this prediction has proven to be spot on, because while there was some initial risk on sentiment in the Asian ex-China session, where the Nikkei rose 1.1% on the back of an early ramp in the USDJPY (following the latest abysmal wage data out of Japan), everything went from bad to worse once Europe opened, and things started going “bump in the morning” across the European banking sector, where not only has it been more of the same with CDS spreads for major banks – most notably Deutsche Bank – continuing their surge wider, but also EM spreads to Bunds all following, with the Portugal-Germany Yield spread blowing out above 300 bps for the first time since 2014 and other peripheral nations following, such as Italy shown in the chart below:
Italy – Germany pic.twitter.com/XwQOsi2grT
— Guy Johnson (@GuyJohnsonTV) February 8, 2016
This post was published at Zero Hedge on 02/08/2016.
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